China’s economic meltdown will spark ‘ripple effect’ hitting UK, EU and US, experts warn | Personal Finance | Finance

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China's President Xi Jinping

What does crumbling China mean for the world? (Image: Getty)

China’s economic meltdown will hit the UK, EU and US, experts have warned the Express as the country struggles to fight economic fires across the board.

Global investors have been dumping China’s major stocks in a mass-scale sellout as concerns for the economy ramp up.

From August 7 to 18, Bloomberg reported that foreign investors offloaded 6.2 billion yuan (equivalent to £676million) worth of shares in China’s largest spirit producer, Kweichow Moutai. This made it the most heavily traded stock in the Hong Kong trading links.

Following closely were LONGi Green Energy Technology, a leading renewables company, and China Merchants Bank, both experiencing significant sell-offs of 4.7 billion yuan each.

In the 12 days leading up to Tuesday, overseas investment funds have also been exiting the Chinese market, resulting in withdrawals totalling £7.3billion.

On Wednesday, the National Bureau of Statistics in China revealed that consumer prices experienced their first annual decline in July in two years, with a marginal drop of 0.3 percent.

READ MORE: ‘Contagion’. China’s property meltdown spreads to banks sparking protests

Construction site of high-rise residential area using crane

China’s real estate market, accounting for one-fifth of its economy, is also suffering (Image: Getty)

This trend of “deflation” paints a particularly grim picture for the world’s second-largest economy, as it means the value of China’s debt – of which it has a significant amount – will increase.

Bloomberg currently estimates total household, business, and government debt at about 282 percent of annual economic output.

The country’s real estate market, which accounts for around one-fifth of its economy, also appears to be suffering with major developers facing significant losses over the past few months. Most recently, this includes Country Garden Homes, which has reportedly missed payments on bonds and estimated billions of pounds worth of losses in the first half of the year.

Global demand for Chinese goods is also easing, with exports reflecting a three-month decline. Meanwhile, imports have dropped for five consecutive months.

Junction in Hong Kong

The pace of China’s export decline is at the fastest rate since the onset of the pandemic (Image: Getty)

Tom Hopkins, portfolio manager at BRI Wealth Management, told Express.co.uk that China’s deflating economy will have ramifications across the globe.

He said: “After 45 years of rapid expansion and globalisation, the Chinese economy might be on the brink of an extended phase of reduced growth, a possibility that could carry worldwide consequences.

“In July 2023, consumer prices in China entered deflationary territory, a usual indication of an economy in decline. The actual concern lies in the potential entrenchment of the belief in persistently dropping prices, causing businesses to delay investments and consumers to put off spending. In China’s case, deflation can also worsen the country’s debt burden, as the real value of debts rises amid falling prices.”

For the global economy, Mr Hopkins said the most “immediate” spillover of a Chinese slowdown will likely come in commodities and the industrial cycle, as China reduces its spending and investment, particularly in its property sector.

He said: “We’ve begun to this see in the recent weakness of mining stocks in the FTSE 100. A slowing China will spark concern for EU companies and economies of which China is one of the most important trading partners.” However, he noted that a “slowing China” could “reduce competition” in global energy demand, especially natural gas.

Mr Hopkins added: “European countries are particularly sensitive to natural gas prices so lower energy demand which should translate to lower gas prices could help ease energy price pressures in Europe and globally.”

Andrew Black, director at global procurement consultancy Efficio, echoed the sentiment, telling Express.co.uk: “China now occupies a critical space in the global supply chain. In 2022 it was both the world’s largest exporter and the second largest importer. It is deeply integrated into the global trading system and any slow-down is likely to have ramifications for countries around the world, some positive, some negative.”

On the positive side, Mr Black said: “A slow-down in the Chinese economy could ease pressure on the price of various goods and commodity items – these days China is usually the single biggest consumer of commodity items, such as steel, gold, copper, oil etc.

“Oil prices, which had started to rise as expectations of a recession in the US and Europe recede, have recently started to fall again, in part due to concerns about China’s economic prospects. If this slowdown continues, and the price of oil continues to fall, we could see reductions in the price of petrol in this country – a welcome relief at a time when inflation in other areas is hitting people’s pockets.”

On the negative side, Mr Black said: “China is a major source of demand for a wide range of British goods and services and a major slowdown has the potential to hit key sectors of the British economy.

“The luxury car sector, for example, has seen demand explode over the past decade as China’s newly minted middle-class looks to spend its money on Land Rovers and Jaguars.

“What is true for the British automotive sector is also true for manufacturers in the other leading economies. Furthermore, although a reduction in demand for commodities is likely to be a net positive for UK consumers, major commodity-exporting nations such as Australia, Brazil and several African nations will likely suffer.”

Mr Black also noted that it’s not just on the demand side that potential risks to global supply chains have become apparent. He explained: “China is now a major supplier of components to a whole range of industries across the globe from electronics to machinery to textiles and chemicals. For example, China is by far the dominant player in the global Electric Vehicle (EV) supply chain with a near monopoly on the various ‘rare earth’ metals needed to make batteries and three-quarters of the entire global battery manufacturing capacity.

“Depending on how deep the Chinese economic slowdown is, and what steps the Chinese government takes to rectify things (for example steps that might impact investment within China), this could severely impact plans to drive increases in the use of EVs outside China. And the Chinese EV battery industry is just one of many upon which global supply chains have become reliant in recent years.”

Chris Clowes, senior consultant at supply chain and logistics consultancy SCALA, said China’s “damaged” economy could result in two scenarios. He told Express.co.uk: “With demand for trade decreasing, Chinese manufacturers could look West for customers as the Chinese economy sinks.”

To counter any nearshoring, he said Chinese companies could “compete” on price with European manufacturers to grow their businesses in the West, “potentially driving down costs down” for Western consumers.

Mr Clowes said: “We are already seeing this with the likes of Chinese-based Temu, which ships products to the UK and US directly from Chinese suppliers and is rapidly growing in the UK.”

The other possibility, according to Mr Clowes, is that the West continues to reduce its reliance on China. He said: “The UK and US may continue to focus on nearshoring and prioritising environmental improvement, while governments could decide to maintain or even increase Chinese trade tariffs. This would drive prices up for Britons as the cost of manufacturing elsewhere is much higher than in Asia. And with either option, it’s possible that China could look elsewhere, such as Asia, Africa or South America, for growth.”

Simon Geale, executive vice president of procurement at Proxima said that with China being the world’s second-largest economy and the biggest exporter, there are “growing fears” that a slowdown of its economy will have a “ripple effect”.

Mr Geale told Express.co.uk: “China’s export figures in July showed the fastest decline since the onset of the pandemic, and may add fuel to the fire for those who are pushing for nearshoring as they look to de-risk supply chains amidst geopolitical tensions.”

Mr Geale continued: “As the country struggles to bounce back from the pandemic, some argue that a weak economy and falling commodity costs signal good news for global consumers and businesses and may help inflation in the US and Europe regulate.”

However, he added: “One thing is clear. All eyes will be on China and how it responds to its current slump, as well as how the simmering geopolitical tensions play out over the coming months.”

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